CAPITALDIGEST MARKET REVIEW. 13 SEPTEMBER 2021

MONDAY 6/9/2021 – DOLLAR STANDS TALL AS GLOBAL GROWTH MOMENTUM FADES The dollar erased all losses sustained after last week’s poor U.S. jobs report and extended gains versus its rivals on Monday as concerns about slowing global growth boosted its safe-haven appeal in a big week for central banks. The dollar index, which measures the currency against six rivals, edged 0.2% higher to 92.31. It had dipped to 91.941 for the first time since Aug. 4 on Friday, when a closely watched U.S. labour report showed the world’s largest economy created the fewest jobs in seven months in August. While the weak jobs report doused expectations the Fed might strike a hawkish note at a meeting later this month, analysts said the data is yet another reminder of global growth losing steam after a bounce earlier this year, a significant headwind for cyclical currencies like the euro and the Aussie. Economic surprise indexes from the United States to China have slipped sharply in recent weeks while latest manufacturing surveys from Britain to Japan show the rise in coronavirus delta cases is sapping sentiment. “The key to the narrative in the next few weeks will be how sharply the growth data can snap back globally, if at all, how the delta variant cases evolve as pupils return to school, and from a momentum perspective do we continue to see real money begin to put money back to work,” said a trader at a U.S. bank.   TUESDAY 7/9/2021 – DOLLAR GAINS AS U.S. YIELDS RISE BEFORE ECB MEETING The dollar rose on Tuesday, moving further off a near-one-month low hit last week, as rising U.S. Treasury yields prompted investors to cut short dollar positions against the euro before a European Central Bank meeting this week. Cryptocurrencies, including Bitcoin, also dropped sharply in volatile trading as several trading platforms said they experienced performance issues. On Friday, the greenback tumbled to its lowest levels since early August after a surprisingly soft U.S. payrolls report prompted analysts to raise bets the Federal Reserve will not unwind its stimulus plans in coming months. But the dollar has gained in the past two sessions. The greenback =USD rose 0.33% on Tuesday to 92.42, after touching its lowest since Aug. 4 on Friday. “It does appear that after the sell-off the dollar has maybe established a short-term base at least,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto. “The Federal Reserve we think is still likely to move toward tapering by the end of this year, the U.S. economy is likely to perform relatively strongly, so our view is minor dollar dips, minor dollar weakness is probably a buying opportunity,” he said. Data on Friday showed speculators’ net long bets on the U.S. currency grew in the latest week, with the value of the net long dollar position at $10.98 billion for the week ended Aug. 31, the largest long position since March 2020. The dollar also benefited from rising U.S. Treasury yields with the U.S. government selling new debt this week, including $58 billion in three-year notes, $38 billion in 10-year notes and $24 billion in 30-year bonds. The yield increase “has helped the dollar index to recoup its post-NFP (non-farm payrolls) losses and then some,” Brown Brothers Harriman strategists said in a note.   WEDNESDAY 8/9/2021 – DOLLAR GAINS AS YIELDS HOLD NEAR RECENT HIGHS BEFORE ECB MEETING The dollar hit a one-week high against peers on Wednesday as U.S. Treasury yields held near the upper end of their recent range and as the euro weakened a day ahead of a European Central Bank policy decision. The dollar index =USD , which measures the currency against six rivals, gained 0.18% to 92.70, the highest since Sept. 1. “We’ve seen the dollar move in lockstep higher with U.S. yields since markets have returned from the Labor Day holiday. The focus now turns to key central bank meetings – with the ECB tomorrow and the Fed later this month,” said Viraj Patel, global FX and macro strategist at Vanda Research. The benchmark 10-year Treasury note yield US10YT=RR has risen since data on Friday showed that U.S. jobs growth slowed while wage inflation was higher than expected. The yields were last at 1.35%, up around 5 basis points from before Friday’s data. An uptick in inflation is complicating the picture for Federal Reserve officials who want to see further progress in employment before reducing bond purchases. “At its very worst, there is some concern that nominal wages are still lagging consumer price increases by cycle extremes … and that nominal wages are struggling to keep up with prices, which is how a wage-price spiral develops,” Alan Ruskin, a macro strategist at Deutsche Bank, said in a report on Tuesday. Investors will look to a speech by New York Fed President John Williams later on Wednesday for any new hints on when a policy change is likely, with many analysts still expecting a taper to be announced later this year. The euro dipped before the European Central Bank meeting set for Thursday. The ECB could tighten policy sooner than many anticipate as inflationary pressures could prove to be persistent, ECB policymaker Robert Holzmann said in a contribution to Eurofi Magazine on Wednesday.   THURSDAY 9/9/2021 – EURO GAINS AFTER ECB SAYS IT WILL SLOW BOND BUYING PACE The euro held onto small daily gains on Thursday after the European Central Bank said it will trim emergency bond purchases over the coming quarter, taking a first small step towards unwinding the emergency aid that has propped up the euro zone economy during the pandemic. In the past two quarters, the bank has bought around 80 billion euros worth of debt each month. It provided no numerical guidance for the three months ahead, but analysts had predicted prior to the meeting that purchases would fall to between 60 billion and 70 billion euros in those months. “The ECB is delivering mainly as expected today,” analysts at TD Securities said in a report on Thursday. “Looking ahead, the focus will be on how the ECB defines “moderately” – anything less than €60bn/mo could be bearish.” The euro was last up 0.02% on the day at $1.1816, though trading was volatile after the ECB statement with the single currency bouncing between $1.1809 and $1.1842. The ECB trod cautiously and flagged no other moves, notably how it ultimately plans to dismantle the 1.85-trillion-euro Pandemic Emergency Purchase Program (PEPP).   FRIDAY 10/9/2021 – POUND AT 1-WEEK HIGH, WEAK DATA FAILS TO DENT BOE RATE EXPECTATION Sterling firmed to a one-week high against the dollar on Friday, shrugging off Britain’s weak economic data on expectations the Bank of England was set to hike interest rates well ahead of its U.S. counterpart. The currency extended gains into a second session, rising 0.3% to $1.3885 against a weaker dollar which slipped after a phone conversation between the U.S. and Chinese leaders soothed market sentiment. The BoE is expected to raise borrowing costs by end-2022 or even earlier if inflation remains high and economic recovery from the pandemic continues, a Reuters poll showed. That comes after Governor Andrew Bailey said on Wednesday that half the bank’s board members deemed conditions were right to start considering rate rises. “Those two positive developments are helping to lift cable back towards the 1.40 level,” said Lee Hardman, currency analyst at MUFG Bank, adding that a rate hike in the first-half of 2022 could not be ruled out. But for the pound to break above $1.40, a level last reached in June, economic data needs to hold up over the next two months and BOE hawkishness to build further, Hardman added. For now, though the British economy began the third quarter on the backfoot, expanding by just 0.1% in July and missing forecasts of 0.6%. The dominant services sector was flat too compared to June Dean Turner, economist at UBS Global Wealth Management said the release was unlikely to dent the BOE’s hawkish mood. “So we continue to expect an interest rate hike in the first half of next year. This should continue to support the pound against its peers.”